Nonprofits Seek Relief and Support from States

Nonprofits deliver crucial health and human services to the most vulnerable populations, but state budget constraints are endangering their operations.

When Betsy Sawyer-Manter buttonholed Maine legislators this session, one thing she knew not to ask for was more money. Not that the nonprofit she heads up didn’t need it, but she knew legislators were already wrestling with the state’s $450 million budget gap. Instead, Sawyer-Manter, executive director of SeniorsPlus, which handles everything from meals on wheels to Medicare counseling, wanted policymakers to think hard about the rules and regulations under which nonprofits operate in Maine.

“Some legislators want to cap our salaries and restrict out-of-state travel,” says Sawyer-Manter, on what she views as extreme oversight being proposed for nonprofits in Maine. She wants less meddling. On her wish list are such items as simpler auditing rules, a straightforward application process for grants, and uniform contracting rules and applications. In short, she wants an easier way to meet all the paperwork requirements the state lays on nonprofits.

In these days of budget constraints and defunding debates, the health and welfare of nonprofits is a significant issue for states. Health and human services nonprofits deliver crucial services to the most vulnerable populations -- in essence acting as shadow government agencies on the front lines of service provision. Many of the services they provide are meant to head off worse and more expensive problems down the road.

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According to a recent study on the nonprofit sector by the Urban Institute, 33,000 nonprofit health and human services agencies now operate nationwide, working under nearly 200,000 contracts and grants to provide everything from housing and youth counseling to job training and elder care. In some states like Maine, nonprofits provide nearly 100 percent of the state’s health and human services.

All totaled, government contracts account for nearly 30 percent of nonprofit agencies’ budgets. Since the beginning of the recession, though, many state governments have slashed nonprofit funding at the same time individual contributions have dropped and as the need for human services has risen. “They’re trying to provide a decent safety net for vulnerable populations,” says Scott Schnapp, executive director of the Maine Association of Nonprofits, “and there’s this huge budget gap.”

Sawyer-Manter may have known not to ask for money in these hard times, but that doesn’t change the fact that administrative relief isn’t all she or other nonprofits need. “It’s difficult,” says Cheryl Burack, executive director of the Coordinating Council for Children in Crisis (CCCC) in New Haven, Conn. “We’re working with families that have experienced significant trauma. My employees are experiencing the secondary trauma from all the painful stories they hear every day, while at the same time not knowing if they’re going to have a job in two months.”

There are other consequences of the budget squeeze. According to the Urban Institute study, nearly half of nonprofits reported late payments by state governments as a constant problem. The epidemic of late payments has not only caused significant uncertainty among providers, says David Thompson, vice president of public policy for the National Council of Nonprofits, but many have also had to take out expensive lines of credit or bridge loans. In referring to the late payments, Thompson repeats a joke making the nonprofit rounds: “In the race to the bottom, it was a 50-state tie for first place.”

In the litany of woes detailed in the Urban Institute report, 68 percent of nonprofits report that government payments don’t cover the full cost of contracted services; 57 percent say they experience mid-stream problems with contracts, including cancellations, cutbacks and postponements. Forty percent calculated that they would be looking at annual operating deficits. On the administrative front, the vast majority of nonprofits -- nearly 80 percent -- find that the application process has become hugely complicated and time consuming. It is, in its way, pushing them further down the cash-short road.

Despite the troubles brought on by tough fiscal times, service delivery has so far held up remarkably well. Only 21 percent of the nonprofits surveyed by the Urban Institute said they’ve responded to budget problems by cutting services. But that remarkable level of constancy comes at a high cost. “Everyone is carrying higher caseloads,” Burack says. “We’re running waiting lists—and the people who come to see us have dire needs. Sometimes I feel like we’re hanging on by our fingernails.”

If a large number of nonprofits have been hanging on by their fingernails, there does seem to be a hint of opportunity in the air. Officials like Maine’s Schnapp and the National Council of Nonprofits’ Thompson see this as a particularly opportune time to push for change within the nonprofit community as well as in the often-troubled relationship between nonprofits and government.

“We’re trying to widen and frame the right conversation about public systems reform,” says Schnapp. Given the squeeze on resources, Schnapp thinks that nonprofits nationally are simply going to have to move to a conversation that looks at a whole range of operating issues, including efficiency, effectiveness, mission and potential partnerships.

The partnership piece is the most obvious one to pursue right now, says Thompson. It may not have much sex appeal, but public-private collaboration is, he says, the “low-hanging fruit here.” He can rattle off numerous examples where government and the nonprofit sectors have recently gotten together to work out issues ranging from late payments to overly bureaucratic regulations. One important example is creating a single repository for all financial and tax status information. That way nonprofits don’t have to file information multiple times with different state agencies.

The stakes are clearly high when it comes to the success of any new push on partnership: It’s estimated that nonprofits employ more people than the construction, finance and insurance industries combined. Replacing that workforce with government employees is obviously not a viable option. So it behooves government to step up -- and in the absence of the ability to contribute more resources -- figure out how to be as effective partners in service delivery as possible.

Connecticut is one state taking on that challenge. Going into calendar year 2011, it had the highest budget deficit per capita of any state, including California, New York and Texas. Clearly it was in no shape to be of any financial help to its nonprofits. But rookie Gov. Dannel Malloy created a cabinet-level position for a liaison for the nonprofit world, and appointed Deborah Heinrich, a former state legislator, to the post.

Heinrich says she has four basic goals. The first is to open up a direct line of communication between the governor’s office and the nonprofit world, something that has heretofore been nonexistent. Second, to “answer the question of how we as a state can clear the path so that nonprofits can focus on the services they provide versus the bureaucratic demands of government.” Third, assess how government can encourage nonprofits to adopt best practices, measure their performance, and encourage cooperation and collaboration among themselves. And fourth, to develop relationships with the state’s philanthropies on ways to “leverage dollars for system change.”

While that might sound like a relatively simple and sensible list, the complications and potential pitfalls are manifold. As Thompson points out, there’s been a certain amount of bureaucratic friction in Connecticut between government and nonprofits. Lawsuits filed against the state in the past for substandard performance on the human services front have complicated decisions about who should deliver certain services.

While the governor and his liaison are working on improving conditions for nonprofits, the nonprofits have stepped up efforts to adapt to the challenges facing front-line providers.

Those challenges have been fierce. In the first two years of the recession, agencies were experiencing 30 percent increases annually in service demands. “We saw organizations scrambling,” says Michael Johnston, CEO of the United Way of Western Connecticut. “They were developing emergency response plans, including pulling in more volunteers and coordinating with other agencies to balance the load. But it was all ad hoc.”

Now, Johnston says, there is a much more methodical and measured effort to encourage greater collaboration among nonprofits. As an example of the new model of collaboration, Johnston points to a promising new coalition of more than two dozen organizations in his region. They are working on an ambitious childhood anti-obesity program, led by the Stamford Hospital, called the Coalition for Healthy Kids.

Meanwhile, Johnston’s Danbury-based organization has taken over the administration of city funds that go to community nonprofits. “It’s an interesting partnership,” says Johnston. “I have the feeling that nonprofits and government -- particularly at the local level -- are really starting to look at ways to work together more effectively.”

That said, the fact remains that nonprofits tend to be turf-conscious. Discussions of merging agencies, for example -- something that’s been happening nationally in response to the big squeeze -- seems to set nonprofit agencies on edge. “We do cooperate and coordinate with other agencies,” says Burack of the CCCC. “But there’s some danger in this merger argument. Having large organizations swallowing up small ones and not valuing the services that the smaller agency provided is always a risk.”

At the same time, the Connecticut Commission on Non-Profit Health and Human Services’ report was just released at the end of March. It includes 49 recommendations, many of which are already being taken up by the Legislature and state agencies.

With $1.4 billion annually in nonprofit service provider contracts, the work has already “fostered increased communication and understanding between the state and nonprofit community-based providers,” says commission co-chair Peter DeBiasi, a member of the Connecticut Association of Nonprofits board of directors. “That will only strengthen our partnership as we work to meet the growing needs of the state.”

For providers like Burack, hanging on by her fingernails, the promise behind that kind of rhetoric can’t be delivered too soon.